PS - I am regularly hearing of 300K for skilled mining jobs. Four times that startled me which is why the post.

------------------------

This is a recent Australian job advert. Rockhampton region - which means the Southern end of the Great Barrier Reef or a short drive from Airlie Beach where it is warm and the sun shines 300 plus days a year.

Google plus has a suggestion process as to who you might add to "circles".

Here - with only minor editing - are five consecutive suggestions made to me:

You see this right. Three of them are Larry Page, Sergey Brin and Mark Zuckerberg in order.

I know none of these people though Zuckerberg shares a single Facebook friend with me and I know someone who was in his computer science classes at Harvard.

Google + is getting users fast - and I find myself looking at Facebook much less - but is the appeal of Google + the asymmetric friending process where I can add people like this to my "circles" and pretend that I am far better connected and far more upwardly mobile than in reality?

For comment.

John

PS. Does anyone else think it is strange that Zuckerberg winds up in my Google + suggested circle so fast?

That is a relief because Hollysys is an amazing company. And because it did not cause the railway accident it should be able to sweep the board of its inferior competition.

How to approach Hollysys

I approach Hollysys like I approach many amazing Chinese companies - businesses with amazing technology, amazing growth and amazing margins.

Some of the amazing claims made have turned out to be false - but some are yet to be falsified and some of those might actually be true. After all 1.3 billion people should be able to some amazing things.

Hollysys however is possibly the most amazing company I have seen yet.

Hollysys makes control systems. It started in the railways industry and specializes in very fast trains. Here is a description from their website:

HollySys Automation Technologies is a leading provider of automation and control technologies and applications in China that enables its diversified industry and utility customers to improve operating safety, reliability, and efficiency. Founded in 1993, HollySys has approximately 2,400 employees with 9 sales centers and 13 service centers in 21 cities in China and serves over 1700 customers in the industrial, railway, subway & nuclear industries. Its proprietary technologies are applied in product lines including Distributed Control System (DCS) and Programmable Logic Controller (PLC), high-speed railway Train Control Center (TCC) and Automatic Train Protection (ATP), subway supervisory and control platform (SCADA), and nuclear conventional island automation and control products. HollySys is the largest SCADA systems supplier to China's subway automation market, and is the only certified domestic automation control systems provider to the nuclear industry in China. HollySys is also one of only five automation control systems and products providers approved by China's Ministry of Railways in the 200km to 250km high-speed rail segment, and is one of only two automation control systems and products providers approved in the 300km to 350km high-speed rail segment.

HollySys has achieved a wealth load of automation and control experience in the multiple business sectors such as Electric Power, Renewable Energy, Chemical, Petrochemical, Cement Processing, Mining and Metal Processing, Environment Protection, Pulps and Papers, Factory Machinery and Manufacturing, Railway and Subway, and Nuclear Power Instrumentation and Control. For the past 16 years, the HollySys name has always been standing as a symbol of quality and reliability in China. HollySys offers a wide range of automation and control products from PLCs to DCS to help you find the solution for any automation and process control application. Through our sustainable business and continuous development in the area of automation, we are able to provide users with a complete and total automation solution for the industries process sectors.

Our corporate mission is to be one of the major platform providers in Automation and Control with innovative technological products and solution back by the highest quality of services and support. We hope to utilize our expertise in the arena of automation technology for better work, life, and environment. We are now the global supplier of choice for innovative technology backed by the highest level of service and support. When you need products and solutions you can rely on, choose HollySys.

Their website then goes through various businesses that they run and describes their achievements. The achievements are on par with global players in the control-automation business such as Siemens. For instance on nuclear power this is what they say:

Since 1995, HollySys starts providing solutions for the nuclear power plant automation in China and since then, we have been continuously providing digital I&C system for the nuclear power plant. Through hardship of innovation and development, HollySys has now self-developed products and solution for the nuclear power plant control system. With more than 10 years of experience and over 40 successful NPP projects, HollySys has both the ability to become very competitive product suppliers and service providers.

In 1997, HollySys developed China’s first computer control system for the nuclear power plant. The system was exported to Pakistan Chashma 300MW NPP and has been successfully operating ever since.

In 1998, Qingshan Phase II NPP adopted HollySys DCS system. It is equip with centralized supervision and safety control of the nuclear power plant with system of conventional island design.

In 2004, HollySys was the first to enter the field of nuclear safety testing and successfully implemented the project of digital safety testing devices.

In 2005, HollySys became the localized sub-contractor of Ling’Ao Nuclear Power Plant phase II, and undertaking the project implementation for digital I&C system.

In 2007, HollySys has successfully developed its first generation totally digital I&C system, the HOLLiAS NMS system.

By far, HollySys has 44 signed and completed contracts within our nuclear power business unit covering almost all of the China’s Nuclear Power Plant either in construction or in operation. These have put us in the top league in competition among other competitors in China. This vast achievement wins recognition from our customers, at the same time, have proven the reliability and safety of our solution, and the professionalism in our engineering services that we provided.

They make similarly large claims about their business in other sectors such as control systems for subway automation or factory automation.

One long investor I know visited the plants and was shown a very impressive company. There headquarters photographed on the website - is very impressive.

But as regular readers of this blog know I am a balance sheet kind of guy. When I see such amazing businesses built out of nothing I want to know what assets are employed and how much cumulative R&D there has been. After all HollySys looks like a serious threat to Siemens on its claimed businesses.

Here is the balance sheet from the last annual filing (on form 20F). Numbers are in US dollars and the balance dates are June 30:

2009

2010

ASSETS

Current Assets

Cash and cash equivalents

$

128,882,666

$

119,501,945

Contract commitment deposit in banks

5,504,375

4,383,684

Accounts receivable, net of allowance for doubtful accounts of $6,276,670 and $8,408,318

56,548,509

64,384,519

Cost and estimated earnings in excess of billings, net of allowance for doubtful accounts of $744,113 and $1,102,016 (note 5)

51,094,660

60,928,056

Other receivables, net of allowance for doubtful accounts of $178,532 and $214,789

4,148,842

4,102,136

Advance to suppliers

7,867,856

10,676,175

Amount due from related parties (note 18)

7,203,058

10,764,828

Inventories, net of provision of $1,114,140 and $2,393,546 (note 4)

18,837,270

23,554,331

Prepaid expenses

1,368,918

1,022,803

Income tax recoverable

-

1,083,640

Deferred tax assets (note 16)

319,737

956,969

Deposit for acquisition of equity interest from minority interest

2,195,582

-

Total current assets

283,971,473

301,359,086

Property, plant and equipment, net (note 6)

47,102,749

65,345,618

Long term investments (note 7)

13,570,578

17,348,159

Long term deferred expenses

91,779

-

Deferred tax assets (note 16)

706,943

677,388

Total assets

$

345,443,522

$

384,730,251

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Short-term bank loans (note 9)

$

5,854,887

$

1,472,559

Current portion of long-term bank loans (note 12)

5,123,026

1,472,559

Current portion of long-term bonds payable (note 11)

-

11,780,471

Accounts payable

37,421,717

41,479,662

Construction cost payable

10,929,116

12,562,565

Deferred revenue

21,072,540

33,552,968

Accrued payroll and related expense

4,162,851

4,386,681

Income tax payable

1,397,706

5,971,136

Warranty liabilities (note 8)

1,631,407

1,916,654

Other tax payables

9,152,197

10,632,611

Accrued liabilities

2,634,107

8,078,783

Amounts due to related parties (note 18)

1,464,683

2,610,599

Deferred tax liabilities (note 16)

277,337

-

Total current liabilities

101,121,574

135,917,248

Long-term b ank loans (note 12)

36,593,041

35,341,413

Long-term bonds payable (note 11)

11,709,773

-

Total liabilities

149,424,388

171,258,661

$

345,443,522

$

384,730,251

Well lets piece this apart. The company claims $65.3 million in property plant and equipment (PP&E) and it directs us to Note 6. Note 6 breaks the PP&E down further:

A summary of property, plant and equipment at cost is as follows:

June 30,

2009

2010

Land use right

$

7,238,446

$

7,282,148

Buildings

13,520,841

13,608,227

Machinery

2,873,789

3,118,451

Software

797,327

1,206,719

Vehicles and other equipment

8,008,915

12,005,119

Construction in progress

23,343,595

39,329,699

$

55,782,913

$

76,550,363

Less: Accumulated depreciation and amortization

(8,680,164

)

(11,204,745

)

$

47,102,749

$

65,345,618

Construction in progress consists of capital expenditures and capitalized interest charges relating to the construction of facilities and assembly lines projects. Interest of nil, $206,595 and $1,102,772 during the period of construction for the years ended June 30, 2008, 2009 and 2010 respectively have been capitalized.

During the year ended June 30, 2009, the Company commenced the construction of a new facility with building area of about 150,000 square meters. As of June 30, 2010, the construction in progress of the new facility was $39 million. The Company completed this new facility and related construction project in August 2010, and the whole construction cost amounted to approximately $44 million including the cost of land use right of $5 million which had been acquired during the year ended June 30, 2008.

The depreciation and amortization for the years ended June 30, 2008, 2009 and 2010 were $1,817,657, $2,241,344 and $ 2,683,042 respectively.

We learn that the 65.3 million in net PP&E is $76.6 million gross PP&E - the difference being accumulated depreciation. Of that 76.6 million most is buildings and land use rights. There 13.6 million in buildings, 7.3 in land use rights and another 39.3 million under construction.

Only $3.1 million of machinery is in use. That is kind of funny because this company is a manufacturer of some pretty high end kit. Indeed it is pretty hard to imagine how you manufacture the control systems (sensors etc and the computers to go with it) with only $3.1 million in kit - but the company seems to do so. Those machines should also include all the computers on which staff make the software to run all this fancy kit. The company has $3000 of kit - so there is less than a laptop per staff member in machines - and surely all of this manufacturing requires some machines.

Whatever: this is a miracle of machine efficiency - as amazing as any other Chinese company I have written on.

The rest of the balance sheet is perverse. The company had revenue in 2009 and 2010 of $157.5 million and $174.1 million respectively. Costs estimated in excess of billings are over $60 million. In other words they have done a third of year's work and not been paid. Net income last year was $27 million. Over the past three years net income is about $20 million. The company has many years income in work which it has done but has not yet got around to billion.

That is perverse. You work and work and work and it is not cash - it is just unbilled receivables. They better be sure they can bill somebody and that they will collect it in cash.

If you look at the last quarterly the costs estimated in excess of billings have ballooned to $86 million. They continue working. They do not collect in cash.

Another 10 million - or half the profits for the last three years - is advanced to suppliers. That number is rising too.

There is 23 million of inventories too. I guess that makes sense - they are a manufacturer - but there are next to no machines to work on these inventories with...

Admittedly their liabilities are also larger than would appear normal - there is for instance 33 million in deferred revenue. That is also large relative to profit. I guess working capital management is just different in China...

Revenue in the last nine months is skyrocketing. Its up over 60 percent. Property plant and equipment however is almost unchanged. This company is one of the most advanced manufacturers in the world - and as far as I can see it does this almost without machines.

Reasons to be long this company

About six months ago I was talking to a (former) long in this company and he told me that I should be wary shorting it. It was very close to the Railway department and the Railway Minister. (My friend just assumed I would be short - but truly I am looking for companies to go long...)

Hollysys he said had lots of Guanxi - and that Guanxi might help them make money. He thought it even possible that they had obtained machinery and know how from the Railway Department without having to pay for it.

He really did think that there was a relationship with the Railways Minister that would play well for the company. And not being that familiar with the innards of the Chinese Politburo I was not one to quibble.

This company has done about 25 million cumulative R&D in the past three years. This is a lot by Chinese standards but it is tiny by the standards of Siemens. Given the enormous advances that this company has (claimed to have) made in fast train and nuclear power control systems I am getting worried about nuclear reactors controlled on the cheap. Still I report: you decide.

Audit

This company is a June balance date. The auditor is BDO Hong Kong. This is an auditor stung a little by scandal lately but then so has every auditor in China.

This one is amazing. Utterly amazing. It might trip up on audit (which is not far away). But this might actually be the real deal - the company with world-class technology on a modest cumulative R&D budget. The company with world class manufacturing where the manufacturing requires next to no machines. The company that does work greater than its accumulated profit and neither expenses nor bills that work. The company that breaks all the rules and still succeeds.

The company that proves that this time it is different in China.

And imagine - because they did not cause the railway accident they are going to be getting a lot more work.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.